Couple of weeks ago McKinsey wrote about the rise of nonbanking platform or fintech companies that are wanting to eat the banks lunch. In this post, i summarise the key points from the Mckinsey fintech report.

1. Banking is in a Flat and Uninspiring Performance Rut

While the banking industry has on the whole recovered from the financial crisis, profits are uninspiring:

For the last 7 years, the industry return on equity (ROE) has remained between 8-10%

Bank shares are trading at low multiples, highlighting investor concerns for the future of banks

Technology companies are disrupting financial services by:

In the retail sector, capturing (or threatening to) the customer relationship which is reducing banking margins

2. The Drivers for Bank Valuations Have Changed

In 2010, valuations were down to the location of the bank operations (74%) – hot markets = hot valuations

In 2017, McKinsey suggest bank business models, strategy, sound initiatives all account for over 60% of bank valuations

3. The Fintech Digital Threat is Greater than First Anticipated

McKinsey propose that while the banking industry shows signs of recovery from the last 8 years, that there is a new threat. Retail and corporate customers are switching to fintech companies for banking services – if this trend and the rate of the switch continues, the anticipated ROE gains could fall from 9.3% to 5.2% in 2025

4. Banks Cannot Afford to Sit on Their Hands

McKinsey suggest that in order to be successful banks must go digital, estimating that doing so would across the industry add $350 million to their bottom line.

Banks need to embark on a comprehensive digital transformation to prepare themselves for a data and digital world.

The warning is stark “A full-scale digital transformation is essential, not only for the economic benefits but also because it will earn banks the right to participate in the next phase of digital banking“.

5. When Innovation meets Scale, Good Things Happen – McKinsey

Fintech companies initially seen as a threat, are now partnering with retail banks

Having made their mark on the retail sector, fintech companies are now eyeing up corporate banking. McKinsey analysis highlight payments solutions for large corporates as a major growth sector

6. Platform Company Strategies are Challenging Incumbent Banks

Because they are:

Putting the customer at the heart of what they do (McKinsey call this “customer centric”), and creating an innovative solution or product (McKinsey call this a “unified value proposition”)

Giving the customer a unique experience, which was not previously available to them

Digital companies are connecting products/services across various industries to create “ecosystems” that are cheaper, more convenient, deliver a whole new experience and captivating the customer

Capturing data about the customer which can be used for multiple purposes

Placing their products and services into the mainstream of the customers daily lives

7. There is Some Hope for Incumbent Banks

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McKinsey highlight:

Research shows that when it comes to putting their money, customers trust banks more than platform companies or fintechs

For now, only banks have access to valuable customer data

Some banks are starting to build digital capabilities – which includes data-driven marketing, robotic process automation, the cloud, APIs and apps

Mckinsey suggest that banks who implement a:

Simple ecosystem strategy may increase their ROE to 9-10%

Complex ecosystem strategy could increase their ROE to around 14%

Banks may chose to:

White label their products and/or services

Become a specialised bank, rationalising their product base and concentrating in specific and profitable areas